How to Account for Patents
Patents give the creator or inventor exclusive rights to manufacture and sell new products or inventions covered under that particular patent. You may acquire a patent by purchasing the patent from the original creator or by registering an invention that you created. Patent registration costs include a registration fee, as well as fees for legal documentation and advice. Patents are considered "capitalized assets" and are expensed, or amortized, over the useful life of the patent (the useful life of a patent is determined by the patent owner and based on industry standards). A patent in a fast-moving industry (e.g., in a technology-driven industry), may only be valid for three years, while advances in roofing materials may have a patent life of 15 years.
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Instructions
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Posting the Cost of the Patent
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1
Create a "Patent" account in the "Asset" section of your general ledger.
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2
Record the entire cost of the patent as an increase to the "Patent" account. The entire cost is either the purchase price of the patent (if purchased from another business or individual) or the cost of registration and legal fees for acquiring a new patent. Generally accepted accounting principles (GAAP), the federally dictated basis for all accounting in the United States, refers to an increase to an asset account as a "debit."
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3
Record the entire cost of the patent as a decrease to the checking account used to pay for the patent. GAAP considers a decrease to an asset account to be a "credit."
Amortizing the Patent
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4
Determine the useful life of the patent based on your industry's norms. A good resource for this information may be a tax attorney or patent attorney.
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5
Divide the entire cost of the patent by the useful life determined in Step 1 to gain an annual expense for the patent. For example, if your patent cost $3,000, and you determine the useful life to be three years, then your annual allowed expense is $1,000.
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6
Record a decrease to the "Patent" account for $1,000 at the end of the first year the patent is in effect.
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7
Record an increase to the "Amortization" expense account of $1,000.
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8
Continue amortizing the patent each year with the same amount until the balance of the "Patent" account is zero.
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1
Tips & Warnings
If you're not comfortable accounting for your patent, consider hiring an accounting professional to assist you with these transactions.
References
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